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Friday, September 30, 2011

Employment, Debt, Deficit & Austerity

Before we get into the details, let me point out that when a government reduces spending, it has to fire people. If there is already high unemployment, this makes it worse. Furthermore, these fired people now stop paying taxes, and collect unemployment benefits instead, making the government's financial problems worse. And finally, these newly unemployed people don't have much money for shopping, so the retail industry suffers a hit, and they order less stuff from manufacturers, and so on. A policy like this, sometimes called austerity, just makes matters worse.

Just to be clear, the debt I'll be talking about is the total amount of money that the U.S. government owes, and that it pays interest on. The deficit is the difference between total government spending and total government income, in one year. It should be clear that the debt is the result of having a deficit, year after year. In order to reduce the debt we need to have an annual surplus instead of a deficit.

Deficit and debt are bad over the long haul. It's quite important to reduce the deficit, and reduce it a lot. But it does not have to be done immediately. It's a long term problem. The main reason to pay off the debt is because of the interest payments that have to be made. Those are a significant part of the government's total expenses, but in 2011 they are still manageable, still less than what we spend on the military, for example. But if the deficit remains high, the debt will rise, and the interest payment will eventually become unmanageable. As we approach that point, interest rates will rise, because lenders will worry about the safety of their investments. Fortunately, that point is still a few years away, but the danger must be taken seriously.

Having 20% of the population under or un-employed is a very serious immediate problem. That is the principal cause of our large deficit, because unemployed people don't pay taxes! There is no doubt that stimulus works if it's the right kind. Giving money to wealthy people doesn't do it. Same for giving money to large corporations. What does work is either the government hiring people directly, like Roosevelt did, or letting contracts to private companies for goods or services that require workers immediately. Since the nation has thousands of roads and bridges that are in serious disrepair, this one is a no-brainer. Do you remember the bridge that collapsed in the midwest a couple of years ago? That's pretty serious. That should have been a wake-up call, but it was not heeded by our dysfunctional congress.

But hiring people, or letting contracts, requires money. If the deficit is already a problem, how can the government spend more money, and where will it come from? The answer is that you have to go where the idle money is, and that location is well known today. It is in the financial accounts of large corporations and very wealthy individuals. If we were to simply return to the taxation policies of 1960's and 70's there would be plenty of money for hiring people and letting contracts. Our financial problems today are in large part due to a steady reduction of the tax rates on high incomes that began in the 1980's and continue today.

What I'm saying is: Increase taxes on the rich and use the money to fix and build roads, bridges, railways, airports, high speed internet lines and hospitals. Also use it to train medical workers and technicians in industries with shortages of skilled labor.

When you hire unemployed people you not only remove them from the unemployment lists, but they then have money to spend, which they do. This spending increases demand for goods and services, resulting in more hiring, to produce those goods and services. It's a positive feedback process. OTOH, if you give tax breaks to wealthy people, they invest most of that money, and so the economy is not stimulated very much. (This would be different if the nation had a shortage of capital, but that is not the case.) The newly employed people also begin paying taxes again.

There are false myths being repeated endlessly by some in public life. One is that if you tax the "job creators" you will hurt the economy. Well, the evidence is clear: those job creators have been sitting on huge piles of cash for several years now, and they are not creating jobs. 30 years ago, when they WERE creating lots of jobs, they were paying MUCH HIGHER taxes than they are today.

It's when the economy is strong, and growing, that governments can, and should, reduce spending.

6 comments:

I agree with you. I just wish there was a way to make them pay. I believe Obama is too afraid to make this happen. Maybe I sound like a crazy person, but I know that Obama doesn't pull the strings. He could.... After hearing Obama's speech I thought, "Wow, what a great plan. A little late, but glad he brought it up.Glad he is speaking against the rich." But soon after realized those CEO's, Presidents and Big Corporate heads will never give up their money willingly. They have grown very powerful, not to say there isn't anything we can do about. Occupy Wallstreet is a good start. I think the problem there is no leader. There is no one person standing up and diplomatically speaking out for their cause. No one to talk terms with, no one who can eloquently speak about what the 99% needs and wants. Its just a semi-peaceful mob of people. We need spokesperson like the yippies had Abbie Hoffman. I believe we need to tax the rich and make jobs...but how can we help make this happen? What kind of changes need to be made? I wish I had more knowledge, there needs to be a voice, a leader....but I am not it at thew moment.

When income was initially taxed in 1913, the law targeted "unearned income", predominately rent collected by landlords. Only 1% of Americans had to file, but the top marginal rate was 90% and remained this high through Eisenhower's administration. Ironically, the progressive Republicans got the law passed.Since then, the tax structure has moved to tax earned (labor) income and given preferential treatment to unearned income resulting in a very regressive structure we experience today. Your solution is sound and may be more acceptable if we phrase it, "Raise taxes on unearned income."

You are at least honest that government has no money that it doesn't take from the private sector. The problem is that government makes inefficient use of capital. The "rich" and corporations will spend this money when they know that market forces will determine the outcomes and not politicians. They are driven to inaction when government starts choosing the winners and losers via crony capitalism. There are also many wise economists who would disagree with you on the effect of FDR's spending during the Great Depression. Many of them contend that his programs only prolonged the downturn.